Fed rule limits credit cards for stay-at-home parents

Household income can no longer be considered, regulator says

A federal rule kicked in Oct. 1 that will prevent many applicants from qualifying for new credit card accounts.

The Federal Reserve's rule told credit card companies that they no longer can consider household income when assessing the creditworthiness of an individual who applies for his or her own card. Under the rule, only an individual's own salary or other income -- rather than combined household income -- can be considered.

One major effect of the new regulation: Stay-at-home moms (or dads) without significant outside income no longer will be able to open their own credit card accounts -- and establish their own credit histories to build their credit scores. Compliance with the rule became mandatory Oct. 1, 2011.

"From an economic standpoint, this is a whopper," said Manisha Thakor, founder of the Women's Financial Literacy Initiative, a financial fellow at Wellesley College and a Houston-based financial analyst. "Not only will be harder to build a credit score, but this ruling is tantamount to assigning a zero dollar value to the work stay-at-home parents do day in and day out to keep households running."

CARD Act mandate
The Federal Reserve said it issued the rule to clarify previous guidelines related to implementation and enforcement of the Credit Card Accountability, Responsibility and Disclosure (CARD) Act of 2009. That law generally enhances consumer protections for credit card users, with one key aspect requiring credit card issuers to carefully consider a consumer's repayment capability before opening a new account or increasing credit limits on an existing account.

With that in mind, the new rule prohibits the consideration of household income if only one person is applying for a credit card account. Instead, it mandates that "a card issuer consider a consumer's independent ability to make the required payments on a credit card account, regardless of the consumer's age."

Key words in that rule include "independent ability" and "regardless of the consumer's age."

Previously, an individual member of a household could qualify for a credit card account by pointing to the combined income of several members of that household. For instance, in the case of a married couple, a stay-at-home wife without any independent income could qualify for and obtain a credit card under only her own name -- and establish her own credit history -- by pointing to the salary of her husband.

That no longer will be the case. Now, she must prove that she can make the payments with only her own resources, a nearly impossible hurdle for many homemakers to overcome.

"They're going to be stuck, really stuck," said Barbara Shapiro, a Boston-area registered investment adviser, vice president of the HMS Financial Group and a certified divorce financial analyst. "It makes these people completely unable to buy an airline ticket, rent a car or do anything that requires a credit card.

"We're becoming a cashless society," Shapiro said. "What are these people supposed to do?"

Earlier interpretations of the CARD Act led some to believe that the "independent ability" clause applied only to consumers under the age of 21, a way to protect college students and other young, usually unmarried, people. The new rule makes clear that it applies to everyone -- and that includes stay-at-home dads.

"Interestingly, this debate of what value to put on child-rearing and households duties has been typically been labeled a 'women's issue,'" Thakor said. "However, as more and more women become the primary breadwinners in their household, rules like this will affect whoever is at home, thus creating some much-needed societal dialogue around this topic."

In effect, the Federal Reserve said it was determined to shield consumers of all ages not only from abuses that might be blamed on credit card issuers but also from their own worst instincts.

"The Board believes that this final rule effectuates the purpose of the Credit CARD Act's ability-to-pay requirement by protecting consumers from incurring unaffordable levels of credit card debt," the Federal Reserve said in issuing the rule.

Other Fed clarifications
At the same time, the Federal Reserve also:

Declared that promotional deferred interest credit card programs that waive interest charges for a specified period of time are subject to the same protections as promotional programs that apply a reduced interest rate for a specified period. "For example, a card issuer that offers to waive interest charges for six months will be prohibited from revoking the waiver and charging interest during the six-month period, unless the account becomes more than 60 days delinquent," the board said.

Made it clear that application fees and any other preapproval fees are covered by the same CARD Act limitations as fees charged during the first year after the account is opened -- and that those total fees cannot exceed 25 percent of the account's initial credit limit.

Objections to new rules
But the household income/independent ability rule was the big news, and many business

They're going to be stuck, really stuck. It makes these people completely unable to buy an airline ticket, rent a car or do anything that requires a credit card.

-- Barbara Shapiro
HMS Financial Group

interests, women's rights advocates and even some members of Congress strongly objected to the regulation.

They said it would reduce access to credit, especially for many nonworking spouses, and it violated the spirit of the Equal Credit Opportunity Act of 1974, which prohibits credit issuers from discriminating on any basis, including gender.

The National Retail Federation said the rule "undermines more than a generation of progress" since passage of the Equal Credit Opportunity Act. The federation represents more than 1.6 million U.S. companies generating more than $2.3 trillion in annual sales.

"Prior to the passage of ECOA, nonworking spouses found it exceedingly difficult to develop credit in their own names," Mallory Duncan, the federation's senior vice president and general counsel, told the Federal Reserve in a letter. "This was true even though they had access to all or a portion of the household funds ...

"As a result, divorced or widowed homemakers discovered that they had no independent credit history and were often unable to obtain even the most basic loans for necessities once the working spouse departed."

Opposition from CARD Act authorsU.S. Reps. Carolyn Maloney, D-NY, and Louise Slaughter, D-NY, both among the principal authors of the CARD Act, said the rule "goes beyond the intent" of the law and "represents a serious risk for women in abusive domestic partnerships."

"Women trapped in abusive marriages may be unable to work due to a controlling spouse, a hallmark of relationships characterized by domestic violence," Maloney and Slaughter told the Federal Reserve in a letter as it was considering the rule. "The availability of an independent credit card may represent her best chance at establishing independence and a path out of a dangerous relationship."

After the rule was announced, Maloney and Slaughter said they would be studying its implementation and would report any problems to the new federal Consumer Financial Protection Bureau, which could write its own rules beginning in July.

Retailers' cards could suffer
The "independent ability" clause generates a particular problem for some retailers, especially those who rely heavily on so-called "private label" credit cards that often are issued at the point of sale and almost immediately. This group includes many clothing retailers, furniture outlets and appliance stores. The vast majority of their private label credit card customers are women, many of them stay-at-home moms, and the initial authorized balances on these accounts tend to be modest.

David Jaffe, president and chief executive officer of Dress Barn Inc., which runs 2,477 Dress Barn, Maurices and Justice stores in the United States, said the rule "would carelessly undermine the importance of nonworking spouses by undervaluing the unpaid caregiving work that millions of women (and other nonworking spouses) provide for society as a whole" and "restricts our ability, and the ability of many other retailers, to serve our core customers."

[T]he proposed clarification would have a chilling effect on the willingness of customers to apply for store credit because of the embarrassment of being denied credit at the point of sale ...

-- David Jaffee
CEO, Dress Barn

"The proposed clarification would significantly curtail many routine credit-granting practices that are valued by both retailers like us and by our customers, such as the opportunity to apply for a new account at the point of sale," he told the Federal Reserve. "In addition, the proposed clarification would have a chilling effect on the willingness of customers to apply for store credit because of the embarrassment of being denied credit at the point of sale, and the possibility of being told by a store clerk in front of other customers that she must have her husband co-sign for the account."

Home Depot also weighed in, saying the new rule "will be particularly unfortunate for those in situations where emergency repairs are needed or in the unforeseen case of a natural disaster," said Dwaine Kimmet, Home Depot's treasurer and vice president of financial services.

Consumer group praise
On the other side, however, many consumer groups praised the rule, saying it would keep consumers from being on the hook with credit they cannot afford or repay, would discourage unnecessary impulse buying with instant credit, and would protect working spouses from being held responsible for accounts they may not even have known about.

"We have consistently taken the position that the ability to pay standard must be as meaningful and vigorous as possible," a coalition of consumer groups, including the National Consumer Law Council, Consumers Union and the Consumer Federation of America, told the Federal Reserve. "Thus, the issuer should be required to consider the ability to pay based solely on the income and assets of the consumer or consumers who are liable on the account.

"Considering the income of a nonobligated household member is contrary to the intent of the Credit CARD Act, given that improvident granting of credit was the very issue that the ability to pay provision was enacted to address ... " the consumer coalition said. "If a stay-at-home mother incurs debt that she has no ability to repay, and she cannot access the spouse's income or assets to repay the debt, she will be in far worse position than if she had never incurred the debt."

Thakor, the women's financial literacy expert, said she saw some value in the rule -- or, at least, in the controversy that surrounds it.

This ruling ties access to credit more tightly to ability to repay, which was a linkage often missing in the minds of many as credit cards were offered freely to one and all, like candy at Halloween.

-- Manisha Thakor
Women's Financial Literacy Initiative

"On the positive side, I'd argue it encourages Americans to really be more conscious and mindful about their use of credit," she said. "This ruling ties access to credit more tightly to ability to repay, which was a linkage often missing in the minds of many as credit cards were offered freely to one and all, like candy at Halloween."

On the whole, however, she was not pleased.

"Given the current demographics in the U.S., this ruling is, in effect, yet another hurdle for American women to surmount in their quest for economic empowerment," she said.

The simple solution, according to consumer groups and the Federal Reserve, is for stay-at-home spouses to open joint accounts with their working spouses.

"The Board understands that a joint application could be inconvenient or impracticable in certain circumstances, such as when a consumer's spouse is not available to apply in a retail setting," the Federal Reserve wrote in its explanation of the rule. "However, the Board does not believe that these concerns warrant permitting issuers to extend credit based on the income of persons who are not liable on the account."

Building individual creditAddressing the issue of building of an individual credit history, the board suggested another path for stay-at-home spouses and other consumers without sufficient incomes to open their own credit card accounts -- becoming authorized users on the account of a spouse. In most cases, credit bureaus will note the participation in that account of the nonworking spouse, a process that will create a credit history, though one that may not be particularly robust.

The Federal Reserve also pointed out that in community property states -- including California and Texas -- nonworking spouses can assert joint ownership of property (including income) acquired by a working spouse. In those cases, issuers can consider the spouse's income when considering a credit card application solely in the name of the stay-at-home spouse, the board said.

But that's a double-edged sword: In those same community property states, divorcing spouses can find themselves at a particular disadvantage because debts run up during a marriage belong to both spouses, regardless of whose name is on the accounts. For a new divorcee with limited ability to get credit independently, this raises the prospect of lots of debt and no way to borrow to pay it off.

In the end, the Federal Reserve said, it tried to balance competing interests as it kept its eye on what it considered the prime directive of the CARD Act and the earlier Truth in Lending Act.

"The Board believes [the acts] were intended to strengthen credit card underwriting standards in order to protect consumers from incurring unaffordable levels of credit card debt," the Federal Reserve said.

Updated: October 1, 2011

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